Do you need a broker to trade forex

Do I need a broker?

If you want to trade in forex, you will need a broker simply because trading is not the same as a one time currency exchange you do at your bank before travelling to another country. The forex market is considered the ideal place to trade.

1. Currencies are ever-changing. You need a trading platform that can provide you currency values in near real-time.

Forex Broker Articles & News.

There are many factors that affect exchange rates of currencies. However some are more important in currency trading than others. These are; Interest and Inflation rates, Trade balance, Currency market speculation, Foreign investment and Central bank market intervention. Learn how to use these factors in your forex tra .

So You Want to Trade Forex?

Created by EQUITIES Magazine.

The current volatility and fluctuation in global currencies have attracted investors and traders to the foreign exchange market. The growing popularity of trading Forex, though, has also created the need for improved regulation to better protect beginners.

Thanks to the Commodities Futures Modernization Act of 2000, regulating bodies like the U. S. Commodity Futures Trading Commission and the National Futures Association have taken on larger roles in establishing proper procedures with the goal of improved oversight and stricter requirements.

"The industry is continuously growing," says Larry Dyekman, director of communications and education for NFA. "Growth with no regulation is ripe for fraud. Customers have lost hundreds of millions of dollars. The CFTC has taken much legal action and hopes that new requirements and regulation [will help] a lot of this fraudulent activity disappear."

As a self-regulating agency for the U. S. futures market, the NFA reports to the CFTC. The Commodities Futures Modernization Act requires that any firm acting as a counterparty to futures contract transactions must belong to some form of regulatory organization.

"There are a lot of reasons Forex is a little more difficult to regulate," Dyekman says. "It's more global, and there's no central clearinghouse. These dealers are acting as the counterparty to the trade, so it's not as transparent as on-exchange futures contracts. So when you don't have that kind of transparency and liquidity in a central location, it's a little harder to regulate."

There are a few major differences when comparing Forex trading to trading stocks. Whether these features create an advantage or disadvantage depends on the investor's preference. Retail Forex operators like FXCM, which boasts more than 100,000 live accounts, have made it easier than ever for beginning traders to enter the market.

"True 24-hour access is a major advantage that the Forex market has over equities and futures—it eliminates weekday overnight risk for traders," says Brendan Callan, managing director of sales and customer services for FXCM. "They can trade as news breaks on the other side of the world, and transaction costs are substantially lower than in the equities and futures market. Leverage capabilities are another draw. In Forex, retail traders can leverage their accounts 100 to 200 times. We don't suggest using that much leverage, but the ability to do so gives them a great deal of flexibility with their trading strategies."

Callan adds that FXCM shifted away from serving as a counterparty to trades, adopting a "No Dealing Desk" execution model three years ago. Forex brokers usually generate revenue by collecting bid-ask spreads, or pips. "FXCM simply passes on the best prices from the many banks that we have clearing relationships with," Callan says. "We don't need them to lose in order to earn revenue, which is the case with many of our competitors, who trade against their own clients."

When selecting an appropriate Forex broker to use, Dyekman recommends that traders do their due diligence and investigate each firm. "Before making any decisions about trading in Forex or any investment decisions, you need to know the product you're going to trade and know who you're trading with," he says.

On the flip side, increased regulation has put the onus on Forex operators to know their customers. The Patriot Act of 2001 requires that all financial institutions verify the identity of their customers as part of an anti-money laundering program. The NFA has put in place a program designed to mirror that of the federal government. In addition to identity verification, brokers are also required to evaluate customer information to provide the appropriate risk disclosures.

"We have a rule that requires our members to obtain certain information from a potential customer before accepting them," Dyekman says. "Things like their name, address, income, net worth, and their experience in trading the product they're going to be trading. There are definite procedures that we ask the firm to follow when they open a new account for a customer."

However, for investors looking to capitalize on the ups and downs of the Forex market, the information gathering and verification process to open and fund an account could take longer, says Darren Rennick, director of transaction software developer M2 Global.

M2 has developed a patent-pending technology called card-integrated acquiring, which streamlines the verification process for Forex brokers and shortens the time it takes to transfer money in and out of trading accounts. For many brokers, the quickest way for customers to fund an account still takes at least one or two days.

"Let's say you open up a trading account, but then it takes five days to get your money into your account and start trading," Rennick says. "You can imagine how frustrating an experience that is for somebody who wants to trade. It's so volatile an industry that the opportunity that you're looking to capitalize on might be gone after five days. The challenge is that it's not particularly easy for people to fund their trading accounts. M2 has solutions to a lot of these problems."

Rennick says that the technology works similarly to how online retailers complete transactions. M2 provides the Forex broker with a merchant account, and through that account, the company's proprietary technology will verify the customer's identity, process the transaction, and fund the account.

"Nobody's come up with a solution until now," Rennick says. "It's patent pending, so we just need to educate people about how it works, why it conforms to NFA regulations—which it does—and then walk them through the technical implementation aspect of it. It's a simple thing to do. The issue that we have right now is that it's new."

After the account is opened, traders should also fully understand the strategies and the potential consequences that they expose their portfolio to. One major risk that beginning traders need to be aware of is the power of using leverage, which is a popular investment strategy that magnifies the impact of trades and market movements.

"Leverage is the big one," Callan says. "Clients that come to this market need to use leverage wisely. Relatively speaking, Forex moves very little. A 1% to 2% move in a day would be considered significant volatility. While 1% to 2% isn't much, if you are leveraged 100 times, that becomes a 100% swing on your account in one trading day. As they say, leverage is a double-edged sword."

For investors that want to trade on the Forex market, Dyekman stresses that due diligence and information gathering is a must. "[The NFA website] goes into a lot of details that you should know," he says. "Please do your due diligence. It's a volatile market place, and you have to have a certain temperament to deal with it."

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Forex Tutorial: How To Trade & Open A Forex Account.

So, you think you are ready to trade? Make sure you read this section to learn how you can go about setting up a forex account so that you can start trading currencies. We'll also mention other factors that you should be aware of before you take this step. We will then discuss how to trade forex and the different types of orders that can be placed.

Trading forex is similar to the equity market because individuals interested in trading need to open up a trading account. Like the equity market, each forex account and the services it provides differ, so it is important that you find the right one. Below we will talk about some of the factors that should be considered when selecting a forex account.

Leverage is basically the ability to control large amounts of capital, using very little of your own capital; the higher the leverage, the higher the level of risk. The amount of leverage on an account differs depending on the account itself, but most use a factor of at least 50:1, with some being as high as 250:1. A leverage factor of 50:1 means that for every dollar you have in your account you control up to $50. For example, if a trader has $1,000 in his or her account, the broker will lend that person $50,000 to trade in the market. This leverage also makes your margin, or the amount you have to have in the account to trade a certain amount, very low. In equities, margin is usually at least 50%, while the leverage of 50:1 is equivalent to 2%.

Another major benefit of forex accounts is that trading within them is done on a commission-free basis. This is unlike equity accounts, in which you pay the broker a fee for each trade. The reason for this is that you are dealing directly with market makers and do not have to go through other parties like brokers.

A trader looking to open a new position will likely use either a market order or a limit order. The incorporation of these order types remains the same as when they are used in the equity markets. A market order gives a forex trader the ability to obtain the currency at whatever exchange rate it is currently trading at in the market, while a limit order allows the trader to specify a certain entry price. (For a brief refresher of these orders, see The Basics of Order Entry .)

Explanation of a Forex Broker.

Why You Need The Big Banks Or Brokerage Houses.

A forex broker is an intermediary between you and the "interbank." If you don't know what the interbank is, it's a term that refers to networks of banks that trade with each other. Typically a Forex broker will offer you a price from the banks that they have lines of credit and access to FX liquidity. Many forex brokers use multiple banks for pricing, and they offer you the best one available.

Opening a Forex Trading Account.

To get an account with a forex broker, it's a bit like opening a bank account.

It requires paperwork and identity verification and such. The whole process takes a few days. However, if you're just looking to test the waters, that is much easier, forex brokers offer demo accounts that you only need to provide minimal information to open. A demo or practice account allows you to get set up and get some practice trading until you're ready to get started with real money.

Forex Brokers Also Offer You Leverage.

The ability to use forex leverage comes with every account, and it varies in an amount anywhere from 10:1 to 100:1. A 10:1 leverage means that for every $1 in your account, you have $10 to trade. Leverage is both good and bad as you can make exponential profits, but you can also suffer from mounting losses. The law requires forex brokers to disclose this, and they typically do in fine print. New traders usually get excited and blow their accounts out quickly if they jump in too fast.

There Are Two Balances.

When you're working and trading with a forex broker, there are two balances. One balance is your actual balance, not including your open trades. Your other balance is the balance that you would have if you closed all your trades. The second balance is called your net balance.

The Spread.

When you open a forex trade with a broker, they pass it through to the market for you.

In the process of this, they offer you a price that is slightly different than the price they can get. This is called collecting the spread. The spread is a commission of sorts that is mostly transparent to trading from the trader's point of view. However, you always have to keep in mind that the beauty of the spread from the broker's point of view is that it's taken from your leveraged trade size, not your account balance size.

Forex is a relatively new arena for many investors. News that affects a stock price may have a radically different effect on the price of a currency. Also, learning how to price currencies and invest in them in a relative environment is often uncomfortable territory when a prospective investor first comes into FX. To battle the lack of knowledge that many have due to the uniqueness of the FX market, many brokers have set up divisions dedicated to education and research to help traders get up to speed and informed on a day-to-day basis. A popular destination is DailyFX.

Forex brokers exist to make it easier for you to connect with the banks out there that are buying and selling currencies. They have a set of rules that they have to follow and certain processes that are required.